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HW-1 Financial Reporting And Analysis

Samrat Kanitkar
FT222092
 PROBLEM 1-5:

1. Prepare an income statement for the month ended September 30, 2012.
2. Prepare a statement of retained earnings for the month ended September 30, 2012.
3. Prepare a balance sheet at September 30, 2012.

All Values are in $ unless expressly specified

Balance Sheet as of 30 September, 2012

Assets Liabilities Shareholder's Equity

Current Assets Current Liabilities

Cash 15230 Accounts Payable 17600 Capital Stock 50000
Accounts Receivable 6410 Notes Payable 20000 Retained Earnings (as of 30 Sept, 2012) 79040 <--- Obtained from
Total Current Assets 21640 Total Current Liabilities 37600 Statement of
Retained Earnings
Long Term Assets
Buildings 60000 Total Liabilities 37600 Total Shareholders' Equity 129040
Land 26000
Furniture and Fixtures 34000
Projection Equipment 25000
Total Long Term Assets 145000

Total Assets 166640 Total Liabilities and Shareholders' Equity 166640

Income Statement for the

Month ended 30 Statement of Retained Earnings
September, 2012
Revenues Retained Earnings as of 1
Concessions Revenue 60300 September, 2012 73780
Ticket Sales 95100 Net Income as of 1
Total Revenues 155400 September, 2012 13660
Dividends Paid -8400
Expenses
Advertising Expense 14500 Retained Earnings as of 30
Cost of Concessions Sold 23450 September, 2012 79040
Rent Expense - Movies 50600
Salaries and Wages Expense 46490
Water, Gas and Electricity 6700
Total Expenses 141740

Net Income 13660

4. You have $1,000 to invest. On the basis of the statements you prepared, would you use it
to buy stock in Maple Park? Explain. What other information would you want before making
a final decision?
All Values are in $ unless expressly specified
All Ratios are unitless

Account Value in USD

Current Assets 21640
Current Liabilities 37600
Working Capital -15960
Current Ratio 0.576
Sales Revenue 155400
Net Income 13660
Profit Margin 8.79%

From the Data available to us from the Financial Statements, we can calculate the Working
Capital, Current Ratio and Profit Margin as above.
A negative value of Working Capital along with a Current Ratio below 1:1 is an indicator that
the Company is not Liquid enough this year to be able to pay off its liabilities. So, given the
current scenario alone, I would not Invest my $1000 in Maple Park Theatres Corp.
However, this data must be available for a number of previous years for comparison and
generating trends (Horizontal Analysis) that can help us decide whether or not to invest the
$1000 that we have with us.
Additionally, some other information such as given below can further enable us to refine
our decision-making ability:
a. Ratio Analysis – Deriving Relationships among Financial Statements using Ratios like
Quick Ratio or Cash Ratio, Earnings per Share etc.
b. Comparison with Industry Averages
c. Comparison with Competitors
d. Vertical Analysis (Comparing Financial Statement Items during a single period).
e. Current condition and changing trends in the Movie Industry.
 PROBLEM 1-7:

1. Prepare a corrected income statement for the year ended December 31, 2012.
2. Prepare a statement of retained earnings for the year ended December 31, 2012. (The
actual balance of retained earnings on January 1, 2012, was $42,700. Note that the December
31, 2008, retained earnings balance shown is incorrect. The president simply “plugged in” this
amount to make the balance sheet balance).
3. Prepare a corrected balance sheet at December 31, 2012. (All Values are in $ unless expressly specified)
Balance Sheet as of 30 September, 2012
Assets Liabilities Shareholder's Equity

Current Assets Current Liabilities

Cash 7400 Accounts Payable 4500 Capital Stock 20000
Accounts Receivable 15200 Notes Payable 50000 Retained Earnings (as of 30 Sept, 2012) 68100 <--- Obtained from
Total Current Assets 22600 Total Current Liabilities 54500 Statement of
Retained Earnings
Long Term Assets
Buildings And Equipments 80000 Total Liabilities 54500 Total Shareholders' Equity 88100
Land 40000

Total Long Term Assets 120000

Total Assets 142600 Total Liabilities and Shareholders' Equity 142600

Income Statement for the

Month ended 30 Statement of Retained Earnings
September, 2012
Revenues Retained Earnings as of 1
Cleaning Revenues - Cash Sales 32500 January, 2012 42700
Cleaning Revenues - Credit Sales 26200 Net Income as of 1
Total Revenues 58700 September, 2012 29400
Dividends Paid -4000
Expenses
Utilities 12200 Retained Earnings as of 31
Salaries and Wages Expense 17100 December, 2012 68100
Total Expenses 29300

Net Income 29400

4. Draft a memo to the president explaining the major differences between the income
statement she prepared and the one you prepared.

The Income Statement, the Retained Earnings Statement and the Balance sheet have thus
been updated with the changes as stated below:

a. Accounts Receivable is not a part of the income statement hence it has been
removed and credit sales has been added.
b. Notes payable is not a part of assets in the balance sheet hence it has been removed
and replaced by accounts receivable which is a part of assets
c. Retained earnings value has changed and the same has been reflected in the sheet
d. Dividends, Accounts Payable are not a part of the expenses in the income statement
hence it has been removed
e. Cleaning revenue- credit sales, net income is not a part of liabilities in the balance
sheet.
f. Notes payable and Accounts payable have been added to the Liabilities and
Stockholders’ Equity.
 PROBLEM 2-5:

1. Determine the current ratio and working capital.

2. Beyond the information provided in your answers to (1), what does the composition of
the current assets tell you about Stevenson’s liquidity?
3. What other information do you need to fully assess Stevenson’s liquidity?
All Values are in $ unless expressly specified
All Ratios are unitless

Balance Sheet
Assets Liabilities Shareholder's Equity

Current Assets Current Liabilities

Cash 23000 Accounts Payable 54900 Capital Stock 100000
Accounts Receivable 13000 Salaries Payable 1200 Retained Earnings 5700
Inventory 45000 Total Current Liabilities 56100
Prepaid Insurance 800
Total Current Assets 81800
Total Liabilities 56100 Total Shareholders' Equity 105700
Long Term Assets
Land 80000

Total Long Term Assets 80000

Total Assets 161800 Total Liabilities and Shareholders' Equity 161800

1 Current Ratio = Current Assets/Current Liabilities 1.458

2 Working Capital = Current Assets - Current Liabilities 25700

a. Looking at Stevenson Inc.’s Current assets, it can be seen that Inventory forms a
major part of the Current Assets ($45000) whereas Cash is valued at slightly less than
half of Inventory ($23000).
b. As a result, the more liquid component of the current assets is lower in value and so,
it might be difficult and time taking for Stevenson’s Inc to fulfil their Liabilities in a
short span.
c. Even though the Current Ratio is above 1 and the Working Capital is Positive, the
liquidity could be less because of the composition of the Current Assets.
d. A more well-rounded decision can be made if it is known how long exactly does
collection of Accounts Receivable and the selling off of Inventory take.
e. Other information needed to assess Stevenson’s liquidity includes other ratios such
as Quick Ratio, Cash Ratio, Inventory Turnover Ratio etc.
PROBLEM 2-7:

1. Prepare a multiple-step income statement for the year ended December 31, 2012.
2. What advantages do you see in this form for the income statement?
3. Compute Shaw’s profit margin.
4. Comment on Shaw’s profitability. What other factors need to be taken into account to
assess Shaw’s profitability?
All Values are in $ unless expressly specified
All Ratios are Unitless

Income Statement for Shaw Corporation - Multiple Step Income

Statement for the year ended 31 December, 2012

Sales Revenue 48300

Cost of Goods Sold 29200
Gross Profit 19100

Operating Expenses
Selling Expenses
Advertising Expenses 1500
Commissions Expense 2415
Insurance Expenses - Salesperson's Auto 2250
Total Selling Expenses 6165

General and Administrative Expenses

Depreciation Expenses - Office Building 2900
Salaries and Wages Expenses - Office 12560
Supplies Expense - Office 890
Total General and Administrative Expenses 16350

Total Operating Expenses 22515

Income from Operations -3415

Other Revenues and Expenses

Rent Revenue 6700
Interest Revenue 1340
Interest Expenses 1400
Difference of Other Revenues over Other Expenses 6640

Income before Income Tax 3225

Income Tax Expense 1540

Net Income 1685
A Multiple Step Income Statement divides the Income Statement into three important
subtotals:
a. Gross Profit: Sales Revenue less the Cost of Goods Sold (COGS).
b. Income from Operations: Gross Profit less the Operating Expenses
c. Income before Income Taxes: Income from Operations less the Non-Operating
Income
Furthermore, it divides the Operating Expenses into two very important subtotals:
a. Selling Expenses: Expenses from all operations related to the Business
b. General and Administrative Expenses: Expenses from all operations required to
support the Business but, auxiliary to it.
As a result of such classification, a more informative representation of the Earnings of the
organization can be derived using a Multiple Step Income Statement.
All Values are in $ unless expressly specified
All Ratios are Unitless

Profit Margin = (Net income)/(Sales Revenue)*100

Computation of Profit
Margin
Net Income 1685
Sales Revenue 48300
Profit Margin 3.49%

The Profit Margin calculated above indicates that for every Sale of a $100 that Shaw
Corporation makes, it earns a Profit of $3.49. In order to make a more comprehensive
assessment of Profitability, the following data would be additionally required:
a. Gross Profit Ratio
b. Return on Sales Ratio
These can be calculated from the Income statement that we have in possession for now.
However, a better situation would be wherein we are in possession of the values of Profit
Margin and these ratios for previous years as well, so that trends can be generated.